United States: SEC Proposes New Exchange Act Registration Thresholds And Changes To Certain "Held Of Record" Definitions

Last Updated: January 16 2015
Article by Dean F. Hanley, Paul Bork and Jonathan S. Romiti

Background

On December 18, 2014, the Securities and Exchange Commission proposed new rules regarding the thresholds at which issuers may become reporting companies under Section 12(g) of the Securities Exchange Act of 1934, as amended in 2012 by the JOBS Act (see the full text of the release here). The SEC has requested that comments on the proposed rules be received by March 2, 2015.

This Alert describes the new registration thresholds in the proposed rules and highlights two key areas to which issuers should pay close attention going forward:

  • an issuer's obligation to verify the "accredited" status of its stockholders at the end of each fiscal year, and
  • the implementation of a safe harbor permitting issuers to exclude from "held of record" calculations stockholders who receive securities under an "employee compensation plan."

Registration Thresholds under the JOBS Act

Prior to amendment by the JOBS Act, federal securities laws required U.S. issuers to register a class of equity securities if (i) the securities were "held of record" by 500 or more persons, and (ii) the issuer held more than $10 million of total assets, each measured as of the last day of the issuer's fiscal year.

Consistent with its goal to provide issuers with greater opportunities to raise capital without subjecting them to the burdensome reporting requirements of registration under the Exchange Act, the JOBS Act increased the "held of record" threshold to either (i) 2,000 stockholders or (ii) 500 persons who are not "accredited" investors. In addition, with respect to issuers that are banks, bank holding companies or savings associations, the JOBS Act increased the "held of record" threshold to 2,000 or more persons, regardless of their "accredited" status. The SEC also proposed various other rules specifically applicable to banks and bank holding companies (treating a savings and loan holding company as a bank holding company for these purposes), which are beyond the scope of this Alert.

Determination of "Accredited Investor" Status

Rather than creating a new definition of "accredited investor" for purposes of Section 12(g) of the Exchange Act, the proposed rules rely on the classic definition of "accredited investor" found in Rule 501(a) of the Securities Act of 1933. However, while investor status is established at the time of the related exempt transaction, an investor's "accredited" status for purposes of determining an issuer's registration obligations would be determined annually on the last day of the issuer's fiscal year.

Under Regulation D, which is commonly used by issuers to raise private capital, status as an accredited investor is established either by self-certification by the investor (Rule 506(b)) or by verified certification (Rule 506(c)), which can be achieved using various safe harbors. However, an investor's accredited status at the time of an investment clearly may not continue in effect at the end of each fiscal year of the issuer. With respect to an issuer's use of information previously obtained from investors verifying their accredited status, the SEC's position is that issuers may not necessarily rely on information obtained from an investor upon an initial sale of securities. Rather, issuers must decide, "based on facts and circumstances," whether it would be appropriate to rely exclusively upon information obtained previously from a particular investor in forming a "reasonable basis" for believing that a particular investor is accredited as of the last day of the issuer's fiscal year.

For a private issuer whose securities are held by a large number of accredited investors, this will pose significant challenges, especially if the SEC's final rules provide no additional guidance or specific examples of what would constitute a "reasonable basis" for deciding that a particular investor is accredited as of the end of the issuer's fiscal year. Issuers may want to resort to the use of a questionnaire sent to stockholders each year to help establish reasonable basis.

Employee Compensation Related Securities

As noted, issuers would also be able to exclude from "held of record" calculations stockholders who receive securities under an "employee compensation plan." In contrast to the SEC's unhelpful treatment of an issuer's annual obligation to determine the accredited status of its stockholders, the proposed rules provide greater clarity with respect to the exclusion of certain holders of employment-related securities from the "held of record" calculations under Section 12. The SEC concluded that securities "held of record" do not include securities held by persons who received such securities pursuant to an "employee compensation plan" in exempt or "no sale" transactions under the Securities Act.

Rather than defining "employee compensation plan" anew, the SEC proposed the adoption of a safe harbor that relies upon the broadly-defined "compensatory benefit plan" found in Rule 701(c) of the Securities Act. This safe harbor would exclude from "held of record" calculations any holders of securities received pursuant to "any purchase, savings, option, bonus, stock appreciation, profit sharing, thrift, incentive, deferred compensation, pension or similar plan" in a transaction that met the conditions of Rule 701(c). For example, in order to qualify as a "compensatory benefit plan" under Rule 701(c), a plan must be written and delivered to employees, and the amount of securities sold under the plan must be limited.

As proposed, the safe harbor would be available to the full class of plan participants described in Rule 701(c), which includes employees, directors, general partners, officers, and certain consultants and advisors, among others. Once such holders transfer the securities, however, the securities would need to be counted as held of record for determining whether the registration thresholds have been met. (Certain transfers, such as to family members, would not change the status of the securities for this purpose.)

Administrative Burdens on Private Companies

As with the annual determination of accredited status, the favorable treatment of holders of employee compensation securities will require issuers to be vigilant about tracking transfers to persons who will be treated as record holders and count against the 2,000 holder limit. These administrative burdens may be difficult for some private companies, who either will not have the resources to make these investigations effectively, or will ignore the rules until it becomes more difficult to make the requisite determinations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
17 Oct 2018, Webinar, Boston, United States

Due diligence is one of the most critical aspects of an acquisition or collaboration. Transactions in the life sciences industry are particularly complex because of the heavily-regulated nature of the industry.

7 Nov 2018, Other, Boston, United States

Please join us on Wednesday, November 7 at the Westin Waltham Hotel for our quarterly New England M&A Forum, which brings the latest in market trends and recent legal developments to the New England M&A professionals' community.

Similar Articles
Relevancy Powered by MondaqAI
Lowndes, Drosdick, Doster, Kantor & Reed, P.A.
Lowndes, Drosdick, Doster, Kantor & Reed, P.A.
Lowndes, Drosdick, Doster, Kantor & Reed, P.A.
Akin Gump Strauss Hauer & Feld LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Lowndes, Drosdick, Doster, Kantor & Reed, P.A.
Lowndes, Drosdick, Doster, Kantor & Reed, P.A.
Lowndes, Drosdick, Doster, Kantor & Reed, P.A.
Akin Gump Strauss Hauer & Feld LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions